GAO found that: (1) GSE changes to foreclosed property accounting are reasonably supported by accounting guidance and in accordance with GAAP; (2) due to accounting policy changes, GSE loan loss reserves are available to cover only loan principal losses; (3) GSE chose to retain over $676 million in loan loss reserves to offset future principal losses; (4) GSE could reduce their level of loan loss reserves if they determine that their reserves exceed the amounts needed for principal losses; (5) the future effects of GSE accounting changes cannot be adequately estimated due to the considerable flexibility in GAAP; (6) the accounting changes did not affect GSE compliance with federal housing legislation minimum capital requirements; (7) GSE ability to comply with the minimum capital requirements would not increase significantly even if they decreased their current reserve levels by the maximum amount allowed; and (8) GSE accounting of loan loss reserves could become inconsistent because of conflicting new accounting guidance on the timing of recognizing selling costs on foreclosed asset financial statements.

Recommendations for Executive Action

Status: Closed - Implemented

Comments: A Technical Practice Aid was published by AICPA that specifies that SOP 92-3 was not intended to address the accounting for loan loss allowances or to prohibit the recognition of selling costs in a loan loss allowance. The draft reiterates that Statement of Financial Accounting Standards (SFAS) 114 requires that selling costs be recognized in the loan loss allowance under specific circumstances. This document was published in November 1994.

Recommendation: To improve the consistency in accounting for selling costs related to foreclosed assets and to clarify ambiguities in current accounting literature that may lead to results that differ from standards setters' intentions, the American Institute of Certified Public Accountants (AICPA) should revise paragraph A-12 of the Statement of Position (SOP) 92-3 by eliminating language which implies that selling costs cannot be recognized as part of loan loss reserves. Additionally, guidance for applying this revision of SOP 92-3 should specifically address the appropriate accounting treatment for entities that originally made accounting changes to adopt SOP 92-3 based on paragraph A-12 that resulted in delaying selling cost recognition until after foreclosure.

Agency Affected: American Institute of Certified Public Accountants

Status: Closed - Not Implemented

Comments: AICPA indicated in its letter dated August 31, 1994, that FASB was addressing this recommendation but that AICPA would be willing to work with FASB if asked. In its letter dated July 12, 1994, FASB did not indicate its intention to involve AICPA in responding to this recommendation.

Recommendation: To improve the consistency in accounting for selling costs related to foreclosed assets and to clarify ambiguities in current accounting literature that may lead to results that differ from standards setters' intentions, the Financial Accounting Standards Board and AICPA should work together to establish consistent guidance for recognizing selling costs for loan types not included in the scope of the Statement of Financial Accounting Standards 114.

Agency Affected: American Institute of Certified Public Accountants

Status: Closed - Implemented

Comments: FASB included the issue of extending SFAS 114 guidance on selling costs to all loans in its 1994 FASAC survey of potential projects to be added to the Board's agenda. Based on the results of the survey, this issue was not added to the FASB agenda. However, FASB and AICPA have formal mechanisms to work together on a continuous basis to address accounting issues, and AICPA issued a Technical Practice Aid that resolved the issue.

Recommendation: To improve the consistency in accounting for selling costs related to foreclosed assets and to clarify ambiguities in current accounting literature that may lead to results that differ from standards setters' intentions, the Financial Accounting Standards Board and AICPA should work together to establish consistent guidance for recognizing selling costs for loan types not included in the scope of the Statement of Financial Accounting Standards 114.